Procrastinating reform: The impact of the market stability reserve on the EU ETS

Abstract

We study the impact of the market stability reserve (MSR) on price and emission paths of the EU ETS. From 2019 onwards, the MSR will adjust the number of allowances auctioned as a function of the size of the surplus, i.e. in times of a large surplus it shifts the issue date of allowances into the future. In a perfectly competitive allowance market the MSR only affects price and emission paths if the baseline equilibrium becomes unfeasible. If the MSR is binding, prices increase in the short run but drop in the medium run relative to the baseline. The MSR increases price variability if uncertainty over future allowance demand is resolved while there is a surplus. The long run cap is unaffected by both the MSR and overlapping climate policies. This contrasts the EU׳s objectives of improving the resilience of the EU ETS and increasing synergies with overlapping climate policies.